Exercise Quality Management
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1 Exercise Quality Management 04 Quality and Economics Dipl.-Ök. Anne Willach Dipl.-Ök. Anne Willach Group Perceived Quality & Product Value Management Department Quality Management Chair of Metrology and Quality Management Werkzeugmaschinenlabor WZL der RWTH Aachen University Steinbachstraße 19, D Aachen, URL: Tel.: +49 (241) , Fax: +49 (241) Quality and Economics E 04 page 0
2 Contents Task 1: Quality-based costs Task 2: Analysis and provision of quality and cost information Task 3: Target Costing Page 1 Quality and Economics E 04 page 1
3 Task 1 Problem Quality and economic efficiency The objective of this exercise is to point out different aspects of lecture four on the basis of case studies. Quality-based costs As an employee in the department of Quality Management you are responsible for monitoring quality. Beside purely technical issues, it is your responsibility to consider economic issues. To be specific, it is your task to provide information for management on the basis of the data and indicators made available to you by various departments, to set appropriate quality cost targets, to document any deviation from these targets and to initiate appropriate measures. Page 2 Quality and Economics E 04 page 2
4 Task 1 Data and Information The data and information which has been made available to you by the sales, manufacturing, assembly and quality assurance departments are presented below. General Information: The average value of scrap is 1, Sales: In the month of May all products delivered in February were re-called and a component had to be replaced. The cost incurred by this action was per product. You have also been given a copy of the following diagrams: Page 3 Quality and Economics E 04 page 3
5 Task 1 Data and Information products still under guarantee Jan Feb Mar Mrz Apr May Mai Jun month complaint costs [T ] Jan Feb Mrz Mar Apr May Mai Jun month Fig. 1: Number of products under guarantee Fig. 2: Complaint costs Page 4 Quality and Economics E 04 page 4
6 Task 1 Data and Information Manufacture and assembly: Hourly wage (incl. ancillary labor costs of 85 %) = 45/hour January February March April May June Reworking hours Number of units Tab. 1: Data provided by manufacturing and assembly January February March April May June Number of units Remaining costs Tab. 2: Actual number of units January February March April May June Tab. 3: Remaining costs The remaining costs contain the costs for material and manufacturing as well as direct costs and overhead costs. They fluctuate monthly, e.g. because of fluctuating capacity utilization and varying purchase prices. Page 5 Quality and Economics E 04 page 5
7 Task 1 Data and Information Quality assurance: In March and April, 100 %-tests due to considerable shortcomings in quality were carried out. The test costs incurred amount to per product. Every month, random-tests took place. The costs incurred by this measure amount to per product. A quality audit is performed 2 times per year. It is anchored in the Quality Policy and its objective is to ensure continuous improvement of products and processes. The Quality Audit is scheduled to take place in January and May. The estimated costs are 80, for each audit. Page 6 Quality and Economics E 04 page 6
8 Task 1 Data and Information Quality assurance also provides you with the following statistics about goods declared as scrap. Goods are declared as scrap if the cost of re-work exceeds the manufacturing cost which was incurred up to the point the failure is discovered or the failure cannot be corrected. scrap rejects Jan Feb Mrz Mar Apr May Mai Jun month Fig. 3: Distribution of manufactured scrap Page 7 Quality and Economics E 04 page 7
9 Task 1 Question a) Classify the quality costs in the cost groups conformity and non-conformity costs and show their distributions for the months January through June in a diagram. Consider conformity costs including and not including remaining costs. Interpret the result! Page 8 Quality and Economics E 04 page 8
10 Task 1 Table Month Jan Feb Mar Apr May Jun Non-conformity costs: total Conformity costs: remaining costs total total non including remaining costs Page 9 Quality and Economics E 04 page 9
11 Task 1 Diagram Conformity costs, conformity costs not including without remaining costs, Non-conformity costs Jan Feb Mar Apr May Jun Month Page 10 Quality and Economics E 04 page 10
12 Task 1 Problem b) Now select an appropriate reference quantity and show the complaint costs as a relative quantity. Interpret the result and compare it with the distribution of the absolute complaint costs. Page 11 Quality and Economics E 04 page 11
13 Task 1 Table 55 rel. cost of complaints Jan Feb Mar Mrz Apr May Mai Jun month Page 12 Quality and Economics E 04 page 12
14 Contents Task 1: Quality-based costs Task 2: Analysis and provision of quality and cost information Task 3: Target Costing Page 13 Quality and Economics E 04 page 13
15 Task 2 Problem Analysis and provision of quality and cost information A detailed analysis of the efficiency and cost effectiveness of manufacturing processes is the subject matter of the following exercise: The Bio Gardening Corporation, which values sustainability, produces and sells, among other things, eco-friendly mowing machines with biofuel-engines. These engines require special camshafts which are being purchased at Modern Engine Tools Corporation. The manufacturing process consists of the following sub-processes: Milling (camshaft) Grinding (camshaft) Assembly (camshaft) complete process Grinding (1) Setting-up (2) Proceeding of manufacturing steps (3) Transport to storage Fig. 5: Manufacturing processes of a camshaft for a biofuel-engine Page 14 Quality and Economics E 04 page 14
16 Task 2 Data and Information In this exercise the sub-process Grinding should be regarded more closely. General information: The plant operating time is 16 h per day (2 shifts). The average of planned production time is 14 h because of a slack periods. During these periods the employees work reduced hours. One employee of the Bio Gardening Corporation earns 9.50 per hour. The material costs are per unit. Page 15 Quality and Economics E 04 page 15
17 Task 2 Data and Information Processing of the work pieces: Once every hour, adjustments to the tool magazine have to be carried out. One adjustment takes 30 seconds. Set-up time in the mornings is 30 minutes. The processing of the work pieces is calculated with overhead costs of 6.00 per hour, this includes e.g. the costs for electricity, tools, depreciation. The cycle time for each unit is 45 seconds. The work pieces are produced in 3 autonomous production steps with interim repositioning. Failures can occur in each production step. The facility produces an average of 925 units per day. Of those, an average of 15 units are scrap. Page 16 Quality and Economics E 04 page 16
18 Task 2 Data and Information Transport: The work pieces are delivered on pallets. While production is in process, the employee removes the finished work piece and places it on a pallet. The small storage 1 is situated near the production facility and the assembly (transportation costs can be disregarded). Storage 2 is situated farther away but the employees prefer this storage. They always take the finished pieces there because Heike, a nice and attractive trainee, works there. At the end of each day, one worker brings the loaded pallets to storage 2. This unnecessary transit takes 4 minutes. Page 17 Quality and Economics E 04 page 17
19 Task 2 Question a) Calculate the overall equipment effectiveness! Page 18 Quality and Economics E 04 page 18
20 Task 2 Question b) During how many hours per day is value-adding work being carried out on the machine? Page 19 Quality and Economics E 04 page 19
21 Task 2 Question c) Calculate the process efficiency factor! Page 20 Quality and Economics E 04 page 20
22 Task 2 Question d) Interpret the differences between the indices! Page 21 Quality and Economics E 04 page 21
23 Contents Task 1: Quality-based costs Task 2: Analysis and provision of quality and cost information Task 3: Target Costing Page 22 Quality and Economics E 04 page 22
24 Task 3 Problem Target Costing The company Cyclo Gras GmbH manufactures lawn mowers that are part of the upper end of the price range. The lawn mower market is well-researched and clearly structured. The required forecasts can therefore be regarded as reliable. Use the data provided to carry out a target cost analysis for a new model, scheduled to displace the current model in 2 years. Page 23 Quality and Economics E 04 page 23
25 Task 3 Data and Information The current product generation and comparable products manufactured by competitors are available on the market for approx. 1, The most up-to-date forecasts provided by market research institutes indicate, however, that the emergence of new competitors from Southern Asia will decrease the price accepted by the market to 1, during the next 2 years. In accordance with the targets set by company management, the aim is to reach a profit margin of 12 %. One of the project teams has conducted a QFD study on the product, the results are available to you (Tab. 5). You also have the cost data concerning individual components/parts of the current product (Tab. 6). Page 24 Quality and Economics E 04 page 24
26 Task 3 Data and Information Components small parts and attachment seat wheels engine battery casing blades and rotor control unit grass collection bin total: Weighting Tab. 5: Results of QFD % % % % % % % % % % Components in present generation small parts and attachment seat wheels engine battery casing blades and rotor control unit grass collection bin total : Current costs of parts Tab. 6: Costs of the components Page 25 Quality and Economics E 04 page 25
27 Task 3 Question a) Calculate the allowable costs of the new product which will make it possible to reach the prescribed profit margin. Page 26 Quality and Economics E 04 page 26
28 Task 3 Question b) Use tables 5 and 6 to calculate the target costs and target cost indices of the different components and enter the values in the table below. Page 27 Quality and Economics E 04 page 27
29 Task 3 Table part used in the current generation current costs of the parts [ ] current share of costs of parts [%] parts weighting [%] target costs of different parts [ ] target cost index small parts and attachment seat wheels engine battery casing blades and rotor control units grass collection bin total: target costs of the product: Page 28 Quality and Economics E 04 page 28
30 Task 3 Question One method to demonstrate whether the target costs are realistic or not, is by drawing up a target cost control diagram. The limits of the target cost zone are described by the following functions: Y 1 = (X 2 - q 2 ) 1/2 Y 2 = (X 2 + q 2 ) 1/2 c) Draw the target cost zone for the following values of the decision parameter q: q=5; q=10 d) Enter the individual parts in the diagram. Page 29 Quality and Economics E 04 page 29
31 Task 3 Diagram share of cost (%) weighting (%) Page 30 Quality and Economics E 04 page 30
32 Task 3 Question e) Interpret the result. f) On what criteria would you base the selection of a value for parameter q? Page 31 Quality and Economics E 04 page 31
33 Task 3 Question g) How would you proceed if a component/part is far outside the target cost zone? Page 32 Quality and Economics E 04 page 32
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